An anticipatory breach of contract is an action that shows one party’s intention to fail to fulfill its contractual obligations to another party. An anticipatory breach ends the counterparty’s responsibility to perform its duties.
Demonstrating the other party’s intention to breach the contract gives the counterparty grounds for beginning legal action. An anticipatory breach is also referred to as an anticipatory repudiation.
Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court. That could include halting payments to the party that committed the breach and immediately looking for ways to minimize the effects of the breach. It also might mean seeking a third party who could perform the duties outlined in the original contract.
Requirements for an Anticipatory Breach
The intent to break the contract must be an absolute refusal to fulfill the terms for it to qualify as an anticipatory breach. The expected breach cannot be based solely on the assumption that the other party will not meet its obligations.
If the anticipatory breach involves the sale of goods, then section 2-609 of the Uniform Commercial Code (UCC) also lays down several requirements. The party anticipating a breach has the right to ask the other party to provide reassurance that the contract will be fulfilled. While awaiting assurance, payments and other duties can and should be stopped. If the other party does not offer the proper assurance within 30 days, the Contract is officially breached.
Example of an Anticipatory Breach
Let’s say a real estate developer contracts an architecture firm to create plans for a new building by a specific deadline. If the developer requests regular updates on the project and is not pleased with the latest results, this is not grounds to claim an anticipatory breach. The architects may be behind schedule while continuing to work on the project. Such a circumstance still leaves the possibility that the architects might meet their deadline if corrective steps are taken.
If the architects took actions that made it impossible to meet the deadline, it would constitute an anticipatory breach. For example, the architects might halt all work on the first project and commit all their resources to a new project with a different developer. That would preclude them from fulfilling the initial contract.